In a new report, Fitch Ratings says that China’s asset management industry looks set for a surge in growth due to sustained GDP growth rates, pension funds development and a strong demand from institutional and retail investors. However, competition amongst players is intensifying and the performance of the Chinese equity markets remains poor.

Thanks to an average annual GDP growth of 9.6% between 1979 and 2004 and an expected GDP growth of 9.8% for 2005, China is expected to become the fourth largest economy in the world, Fitch notes. The disposable income of China’s population, which accounts for almost one quarter of the world’s population, is growing at double-digit rates, fostering the rapid development of a middle-and upper-class.

At the same time, many Chinese continue to save a relatively high portion of their income – the current saving rate is around 40%- and place a significant portion of their assets in bank deposits, the rating agency says. At the end of 2005, saving deposits in the Chinese banking system reached nearly 15 trillion Yuan (about €1.53 trillion), representing a 16% year-on-year growth. This environment naturally paves the way for an exponential development of China’s asset management industry, Fitch suggests.

However, Fitch notes that institutional investors, and not retail investors, might become the primary growth driver for the industry in the coming years. The one-child policy implemented in the 1970s to control population growth has intensified the aging of China’s population – around 25% of the Chinese population will be above 60 years old by 2030. This makes it necessary for China to have a comprehensive pension system.

As a first milestone, the Chinese government set up a Social Security Fund in 2000 and encouraged enterprises to set up annuities for their employees through the issuance of a series of Enterprise Annuity legislations, effective from May 2004. At the end of 2005, SSF and EA’s assets reached approximately 200 billion Yuan (€20.4 billion) and 100 billion Yuan (€10.2 billion) respectively, and are expected to reach 1 trillion Yuan each by 2010. “As part of these assets will be managed by the asset management companies, it is easy to imagine the potential growth for asset managers,” Fitch suggests.

Fitch adds that the rapidly expanding insurance sector is also expected to fuel the development of China’s asset management industry. The total assets of insurance companies in China reached 1.5 trillion Yuan (€153 billion) as at November 2005, of which only 105 billion Yuan (€10.7 billion), around 7%, were invested in investment funds.

Foreign investors, eager to benefit from the booming Chinese economy, should also contribute to the growth of the Chinese asset management industry, Fitch suggests. While only those foreign institutional investors with a Qualified Foreign Institutional Investors license are allowed to invest in Chinese securities, the Chinese regulator increased the quota for QFII by US$6 billion in July 2005, bringing the total amount to US$10 billion. In addition, the agency notes that China’s share-reform programme launched in May 2005 aimed at floating untradable shares of companies should also broaden investment opportunities in Chinese equities in the medium-term.

Fitch notes that an increasing number of players want their share of the loot. “While the Chinese government had first prevented local commercial banks and insurance companies from developing asset management activities, three local pilot banks successfully launched their asset management business in 2005 and more local commercial banks and insurers are expected to get government approval to invest directly in the sector this year,” it says.

“At the same time, foreign players continue to show a strong interest in the Chinese asset management industry as illustrated by the entrance of another seven foreign financial institutions to the market in 2005,” Fitch adds. “The number of funds offered continues to grow with 57 new products launched in 2005, but assets collected tend to decelerate.” The average subscription in launch periods decreased to 1.76 billion Yuan in 2005, only half of the level in 2004.

“In such circumstances, asset managers with the strongest investment platform, a solid financial condition, the largest distribution network and the best reputation will be the primary beneficiaries of this growth,” Fitch predicts. “Others might face disillusion.”

“Despite China’s strong economic growth, the nation’s equity markets have performed poorly over the last four years. The Shenzhen and Shanghai A-share stock price indices lost 41% and 48% respectively between June 2001 and December 2005. China still has many characteristics of an emerging economy,” it cautions. “Its financial sector continues to suffer from poor transparency and weak corporate governance practices. In addition, Chinese investors remain very volatile, leading to high redemption rates in investment funds.”

@page_break@At end-2005, 49 fund managers, including 18 sino-foreign joint ventures, started asset management business in China, operating 54 close-ended funds and 164 open-ended products. The total managed assets reached around 470 billion Yuan, compared to 325 billion Yuan at end- 2004, with around 387 billion Yuan invested in open-ended products and the remaining attributed to close-ended products.